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Wednesday, April 29, 2015

Thessaloniki taxi driver Gregorios Sachinidis sitting for the last time behind the wheel of his record-breaking Mercedes-Benz 240D (4.6 million kilometers!) before donating it to the Mercedes-Benz Museum in 2004 (Pictures: DPA/DPAWEB via FAZ.net).

When I exploited Greek taxi driver Gregorios Sachinidis for my satirical post on the Greek bailout negotiations’ taxi connection/slander recently, I had no idea that Mr. Sachinidis really exemplified the outstanding spirit of cooperation that prevailed between Germany and Greece in the postwar period and replaced the sorry inheritance of World War II (and may be replaced in turn by the current animosity between the two countries). So let me briefly recapitulate his story in this new series I started somewhat sarcastically on Monday with Yanis Varoufakis and his channeling of ancient German battle cries (“Viel Feind, viel Ehr”), in the interests of international understanding (“Völkerverständigung”).

Mr. Sachinidis came to Germany at age 18 in 1963 as one of many “guest workers” from Greece, Turkey, Italy, Spain, Portugal and the former Yugoslavia to fill the labor gap of the postwar German “Wirtschaftswunder.” Fortunately, the powerful German unions had demanded that these “Gastarbeiter” (not to be confused with WWII “Zwangs-“ and “Sklavenarbeiter”) be paid and treated according to the regular collective bargaining contracts and not be exploited as an unprotected secondary labor market (in contrast to the recent trends of European integration). This didn’t mean that they didn’t wind up in the most undesirable housing at the margins of German society. Nevertheless, millions stayed on and benefited from the superior job opportunities Germany had to offer, sent their kids to German schools (from which many emerged as members of parliament and ministers), and largely integrated into this new and alien society.

Others, like Mr. Sachinidis in 1978, eventually returned to their home countries and invested their hard-won savings in new businesses. After 1981, when Greece first permitted Diesel taxis, Mr. Sachinidis saw his chance, and with the assistance of his brother, who had worked at Mercedes-Benz, managed to locate in Germany a used 240D, his dream taxi, and import it to Greece (being used, its deleterious effect on the Greek balance of payments was undoubtedly fairly minor). The rest is Guinness Book of Records history (not to mention that the 240D played a decisive role in impressing his fiancé enough in 1983 to marry him).

In the twenty-three-year taxi lifetime of his 240D Mr. Sachinidis proudly chauffeured such dignitaries around as German soccer star Gerd Müller (who we trust he did not overcharge) and transported humanitarian goods almost four hundred times to war-torn Serbia.

After donating the 240D to the Mercedes-Benz Museum, Mr. Sachinidis received a new C200 CDI from Alexander Paufler, president of Daimler Chrysler Hellas (after unfortunately committing the “faux pas” of having bought a French Peugeot as its replacement). Truly a heartwarming story of successful European solidarity!

Personal footnote: During the late 1970s, while a student at the University of Tübingen, I spent three summers building the successor model to Mr. Sachinidis’ 240D, the W123 series, at Mercedes’ main assembly plant in Sindelfingen. The amusing tales of industrial relations and Modern Times assembly-line surrealism will be, hopefully, the subject of future posts.

The successor model to Mr. Sachinidis’ 240D, the W123 series, of which I have fond memories from both the insides and outsides. (Picture: Wikimedia Commons)

Monday, April 27, 2015

From the darkest depths of their collective subconscious, Europeans in their moments of crisis are waking up to the fact that they actually have much more in common than they had been aware of.

Thus, after his dressing down last weekend in Riga by the Eurogroup finance ministers as “a time-waster, a gambler and an amateur,” Greek Finance Minister Yanis Varoufakis tweeted back an honor-salvaging quote from American New Deal President Roosevelt:

He may not have realized that this quote actually places him firmly in the cultural camp of his prickly German counterparts, for it is only a variant of the 1513 battle motto of German Landsknecht commander Georg von Frundsberg at the Battle of La Motta:

Viel Feind', viel Ehr' ("Much foe, much honor"),

a philosophy that also stood German Kaiser Wilhelm II and German Führer Adolf Hitler in good stead in their respective (if somewhat flawed) battles for European ‘solidarity.’ Notice that the original German also has the advantage of being much more succinct and alliterative.

Monday, April 20, 2015

The writing on the wall may now be in Greek (“Grexit, Graccident, Grone”), but its meaning may not have changed much from Daniel 5:25–28: מנא, מנא, תקל, ופרסיןMene, Mene, Teqel, Upharsin

Only now have commentators and the markets woken up to the fact that a Greek default and possible exit from the Euro might really be impending. They seem to have been lulled into complacency by the conviction that the Eurozone powers that be (EC, ECB, IMF, the EZ creditor countries, revolving submissive EZ debtor governments) have always been able to pull a rabbit out of the hat at the last minute since Greece initiated the sovereign debt crisis in 2010. Yet the writing on the wall has been visible for all to see since the end of the Samaras government in Greece and its replacement by the Syriza anti-austerity coalition, that is, since February.

[I] wonder whether one or more people on both sides of these discussions may simply be miscalculating. We may be on the verge of one of those sleepwalking moments in European history.

“Sleepwalking” will be an expression familiar to the readers of this blog.

And today’s New York Times brings us Paul Krugman’s Greece on the Brink, a remarkably conciliatory piece for Paul implying that the negotiations between the Eurogroup and Greece have really been conducted in good faith on both sides. And if only men and women of good will would sit down together over retsina, it could all be worked out to the satisfaction of both parties.

While I cannot claim to have special insight into the minds and especially the subconsciousnesses of the negotiators, I read the present situation much more direly. As I already pointed out on April 1 (no joke), I think we have long ago moved from a game of chicken (i.e., irresponsible brinksmanship) to a game of turkey (i.e., a post-mortem blame game). And that the negotiations have long since ceased to be in good faith.

So why have the parties been keeping up appearances nevertheless? Let me answer by going over the points raised in Paul’s NYT op-ed.

1. “Don’t you think they want us to fail?” Paul was asked by many Greeks during his recent trip there. Maybe the answer really is yes, and for the reason Paul also gives: as an example for other opposition parties like Podemos in Spain against bucking the austerity line. And don't underestimate how much pure pique may be driving someone like Wolfgang Schäuble, who undoubtedly resents having to deal with deja-vu 1968 leftist types like Tsipras and Varoufakis publicly flouting the Eurocratic rulebook. Maybe “they” really intend to hang Greece out to dry as a warning to other obstreperous populists. The “success” of the Eurozone in containing the Cyprus crisis by imposing currency controls (but who ever heard of a currency union with currency controls on one of its constituents?) and depositor haircuts may have emboldened some into thinking a much larger containment exercise can also be surgically performed on Greece. After Lehman Bros. one is entitled to have some doubts.

By late 2014 Greece had managed to eke out a small “primary” budget surplus, with tax receipts exceeding spending, excluding interest payments. That’s all that creditors can reasonably demand, since you can’t keep squeezing blood from a stone. Meanwhile, all those wage cuts have made Greece competitive on world markets — or would make it competitive if some stability can be restored.

Despite the immense internal devaluation (wage cuts), Greek exports, unlike in Ireland, Portugal and Spain, have decidedly not increased, nor have export prices declined (see the recent paper by Daniel Gros). Contrary to what Paul claims, Greece’s international competitiveness has not been restored despite all the suffering. Thus Greece really is a special case and a mystery to even fanatical adherents of austerity and internal devaluation. At least Ireland, Portugal and Spain can claim to see some light at the end of the tunnel, especially after the ECB’s QE (“Querency Easing”) Program, which has very effectively devalued the Euro (its very thinly veiled intention). But unemployment remains so high that the incumbent governments of these states still need to fear being voted out of office.

And one can attempt to squeeze blood from stone: the creditors still insist that Greece raise its primary surplus to the previous government’s promise of 3.5% this year (original troika target 4.5%) and 5 4.5% next year. But without a restructuring of Greece’s nominal debt and export surpluses Greece remains the German government’s worst nightmare—a bailout bottomless pit.

3. One can really question whether the Greek government is also actually negotiating in good faith (I have no doubt that the creditors aren't) and not rather rolling in self-righteousness as the valiant but doomed Don Quixotes tilting against Euroausterity windmills (see my taxi driver post). Of course the "taxi driver" slander may just be the limited prejudicial stereotyping of Greeks by northern European Eurocrats whose only knowledge of the country derives from contentious taxi trips between the airport and Athens hotels (while the Greek Finance Ministry hastened to dismiss this report).

There is a pipe dream current in Brussels that Tsipras can still prove his statesmanship in a volte-face, expel the leftwing of his party, form a new government with centrists, and in an act of brutal realism accept the same bailout terms his predecessor Samaras agreed to but also could not implement, the bailout terms that got Samaras voted out of office in the first place and were the bugbear that got Tsipras where he is today. But it is hard to see how he could preserve his self-respect if he did so, let alone the respect of the Greek electorate.

Thus I think many people are clutching at straws when it comes to repressing the Greek nightmare. But I have been proven wrong before.

Let us only hope that Daniel’s reading of the writing on the wall does not turn out to be the epitaph of the Eurozone:

And this is the writing that was inscribed: mina, mina, shekel, half-mina. This is the interpretation of the matter: mina, God has numbered the days of your kingdom and brought it to an end; shekel, you have been weighed on the scales and found wanting; half-mina, your kingdom is divided and given to the Medes and Persians.

No one knows what a Grexit/Graccident would look like, but Gustave Doré’s vision seems as good as any.

Update April 21, 13:18: European Commission President Jean-Claude Juncker, in an interview today in Politico, “ruled out a Greek debt default or exit from the eurozone…[He] said his main reason for optimism rests less on any tangible progress than on the simple fact that the alternative is unimaginable.”

I assume that until recently he and his colleagues in Brussels would also have ruled out the possibility that a copilot employed by a leading European airline would deliberately crash his plane with 149 passengers onboard as “unimaginable.”

This Eurocratic faith in human reason is immensely reassuring and now puts to rest the budding suspicion that at least some Europeans in responsible positions might actually have acquired a taste for suicidal self-destruction or ‘Götterdämmerung’ (European privacy laws prohibit us from giving full names at this point).

Update April 22, 15:26: It looks like the ECB’s Mario Draghi has been delegated to give Greece the coup de grâce after all: “European Central Bank Squeezes Greek Banks, Tightening Access to Loans,” New York Times April 21. None of the elected officials seem to have the b***s to do it (with apologies to Angela Merkel), despite Draghi’s insistence that it was ultimately their call. It is not the first, and undoubtedly not the last time Draghi will have to do the heavy lifting in the Eurozone. And EC President Juncker, as we have seen above, is still out in “unimaginable” lala land. And you thought the 2013 Tea Party Shutdown in the US was the height of government self-destruction!

Thursday, April 16, 2015

I posted my PINE-UCM slides yesterday around noon (Central European Summer Time) based on a talk I gave the evening before to undergraduates that attempted to break a lance for the centrality of multiple coordination equilibria, nonlinear dynamics, network and complexity theory in economics and finance. This is something I have been thinking about for a long time (see my 2010 presentation at the INET Budapest ‘Alternative Macrodynamics’ conference, available as a pdf file here). And of course I don’t claim to be the first person to think along these lines.

Then I took a train to Berlin, arriving around midnight, and checked my ‘usual suspects’ websites before going to sleep. And low and behold Paul Krugman had, in the meantime, coincidentally written a blog diatribe precisely on the subject of multiple equilibria and nonlinearity, apparently triggered by recent articles by Frances Coppola and Wolfgang Münchau (only the second of which, in Monday’s Financial Times, I had already seen—and don’t forget the Umlaut in his name!).

Of course it’s facile for non-card-carrying economic kibitzers to poke fun at the academics. And while I avidly and appreciatively read Wolfgang’s comments in both the Financial Times and SpiegelOnline and subscribe to his main points about multiple equilibria and nonlinearity, he really does not give any compelling substantive arguments for his claims. Both Coppola and Münchau seem (at least to professional economists) to be indulging in just armchair hand waving, at taking cheap shots. But why Paul Krugman should be so personally piqued by this discussion is puzzling.

His argument seems to boil down to essentially two parts:

1. “Been there, done that!”

True! In spades! In fact, Paul Krugman received the Nobel Prize precisely for his work in new trade theory and new economic geography, which also uses multiple equilibria and nonlinearity as central tools (nice bifurcations there, Paul). Something that in his modesty he doesn’t even mention in his diatribe. As have many other well-known, reasonably mainstream economists, such as Diamond and Dybvig on bank runs, as he points out. In my lecture I go even further back in time to Nicholas Kaldor’s 1940 Keynesian trade cycle model, and return to the present for Paul de Grauwe’s recent work on the dynamics of the Euro crisis. No argument here.

2. “That kind of stuff is too easy and too much fun”

Whoa! Since when were “easy” and “fun” incompatible with good science and now are a mark of opprobrium? Maybe it was too easy to generate spurious chaos models in the 1980s when it became clear how trivial it was to do with simple one-dimensional nonlinear discrete-time dynamics (remember the logistic equation?). But after that fad subsided, no serious scientist had any doubts that nonlinearity was of critical importance in lots of different fields (and why should economics be an exception?). Multiple equilibria (and even more complex dynamical regimes like limit cycles, chaos, and self-organized criticality) were shown to be certainly possible and important in an increasing number of domains. And this can be hard work, both theoretically and empirically (not that this is an essential criterion), not just idle fun and games for playful graduate students. So what’s going on here to turn Krugman against his own roots and better judgment? Fear of being flakey?

This does look like something that can only be explained by his psychoanalyst (in the unlikely event that he has one). Paul goes on to describe his own intellectual development:

And in my case, at least, I ended up with the guiding principle that models with funny stuff should be invoked only when clearly necessary; you should always try for a more humdrum explanation.

Well, I have no problem with Occam’s Razor, nor does any other scientist I know. If Paul can make sense of the present crisis using a simple, one-equilibrium IS-LM model augmented with a nonlinearity at the zero lower bound of interest rates, more power to him (and his prediction that inflation would be tame there despite the monetary expansion of the central bank seems to have been entirely on the mark until now). But if everyone was always a priori allergic to “funny stuff,” we would never have gotten relativity theory, quantum mechanics, or even the heliocentric theory of the solar system. So what gives? Are we now confronted with a multiple personality Paul Krugman who rejects the excesses of his youth? Who after going into orbit in the academic, journalistic and political worlds returns to the earth and now is an intellectually different person from the scientifically progressive twin personality he left behind (in analogy to the famous Einstein twin paradox)?

Paste together your own Krugman Twin Paradox by inserting the two bottom pictures into the Einstein Twin Paradox template above (left: PK, exceptionally, on extreme right with an 1976 IMF delegation in Lisbon; right: PK in an interview with ABC television in 2014). Replace the word “relativity” with “macroeconomics.”

Coming up: Multiple equilibrium models—do they really make any difference at the zero lower bound, or are they just Hicksups?

Wednesday, April 15, 2015

Economics students around the world have been venting frustration with the orthodox curriculum in the wake of the 2008 world economic crisis. As readers of this blog will be aware, I have considerable sympathy with their plight.However, there has been a wealth of proposals for how to reform economics and finance in recent years, much of which has only muddied the waters and deepened the despair of both the general public and economics students alike.At the invitation of the Pluralism in Economics group at University College Maastricht, I gave a lecture last evening that argued that understanding only two simple principles takes us a long way to understanding the complex social reality we live in.These principles are

It takes two to tangle (tango);

What goes around comes around.

I’m making a revised version of my slides available for a general, non-technical audience: download here. Enjoy.And don’t forget to attend Paul de Grauwe’s Joan Muysken Lecture on “Is the Eurocrisis over?” this coming Monday, April 20, in Maastricht!

Sunday, April 12, 2015

Prediction is very difficult, especially if it's about the future.

Nils Bohr

April 9 has come and grone, yet Greece managed to pay off its €458 million debt to the IMF by scrapping together the bottom-of-the-barrel cash balances of the electricity board, pensions and other government agencies, defying my recent conjecture.

Meanwhile, the groundhog day ritual between Greece and the Eurogroup of finance ministers pondering the release of the remaining €7.2 billion in overdue bailout funds continues. The Frankfurter Allgemeine Zeitung reports in its Saturday edition that (my translation)

The Greeks sent a new representative, the General Secretary of the Finance Ministry Nikos Theocharakis. He reportedly only asked again and again “like a taxi driver” about where they are hiding the money, and claimed that his country was on the verge of bankruptcy. The representatives of the creditors, however, did not share this view. They stated that Athens could still meet its international obligations even if it meant that salaries and pensions could not be fully paid. This would merely be a domestic Greek problem, the paper’s sources reported them as saying.

As anyone who has been to Athens will fondly recall, if anyone can extract billions of Euros from tight-fisted Eurozone finance ministers, it is Greek taxi drivers, who have been known to easily charge four times the regular price on the way in from the airport.

Of course I do not mean to insinuate that Greek Taxi champion Mr. Sachinidis (pictured above) would ever cheat his customers. However, his ability to extract more than five times the expected mileage from his top quality German car (the purchase of which was a major contributor to Greece’s present indebtedness, I should point out) would seem to highly recommend him to the Greek Finance Ministry as a suitable replacement for the hapless Mr. Theocharakis. If the Greeks feel that they now need to haggle like taxi drivers, at least they should send a real one!

While Greece has, to everyone’s surprise, managed to take the April 9 IMF hurdle, its troubles are only beginning, as the chart below makes clear:

Postedit April 17: I have now revised this chart by correcting some errors in the Bloomberg source using IMF data. Bloomberg left out the substantial repayments to the IMF on May 1 and 12, and used an incorrect SDR/€ conversion for the June 12 payment.

Wednesday, April 1, 2015

Is the Eurozone sleepwalking its way to disaster, or is there method in this madness?

The Greek debt crisis was supposedly resolved, or better, postponed, for at least four months, on Feb. 20. Instead we now find ourselves this week back to square one, with the Greek government resubmitting vague and insincere “reform” plans while the “troika” (now renamed “the institutions”) still insists that the draconian austerity measures agreed with the previous Samaras government be implemented to the letter (or, as German Chancellor Merkel now allows, up to some cosmetic reshuffling that is fiscally neutral, i.e., equally contractionary). Meanwhile, the Greek government is playing the Russian card, something I facetiously recommended to it in my Feb. 15 post. This will undoubtedly endear it even more to its Western allies.

The Greek debt crisis has now been playing out for five years and things have only gone from bad to worse (with the Greek debt ratio rising from 110% to 170% and unemployment stuck at 25%). Almost all economists agree that nominal Greek debt is unsustainable (even if on a net present value calculation it may be considerably more modest), and that growth will not resume until it is convincingly restructured. No package of “structural reforms” (many of which will actually be inimical to growth, at least in the short term) is going to change this, however reasonable many of these measures may be (and at least the reasonable ones should have been implemented before Greece joined the Eurozone). Both Paul de Grauwe and Michael Pettis have recently argued that addressing such structural issues cannot in itself be a substitute for demand management and debt restructuring. A cynic might even claim that they are indeed just fig leaves for punishing internal devaluation and debt deflation.

So what is going on here? Is the Eurozone just trying to vindicate Einstein’s purported definition of stupidity as "doing the same thing over and over again and expecting different results"? Are the actors even negotiating in good faith?

While Martin Wolf in today’s Financial Times still thinks that a Graccident can be avoided, I now conjecture that both “the institutions” and “the Greek government” have already moved well beyond this point. Having previously played a game of chicken with each other (see here for a nice game-theoretic definition), they are now playing a game of turkey: both parties, having now realized that the worst-case scenario (Grexit) in which neither can back down because losing face is even more painful, is now inevitable, all they care about is shoving responsibility for the ensuing disaster onto their opponents. Germany cannot back down because loosening the “bailout” terms for Greece will only encourage populist parties in Spain (Podemos), Portugal and perhaps Ireland to agitate for the same. And the current Syriza government in Greece, in abjectly surrendering to “the institutions’” old terms as the latter still insist, would have no other honorable course than to return its mandate. But no one wants to be left holding the bag.

Already ECB President Draghi has made known that he does not want to be the odd man out responsible for Grexit by withholding refinancing from Greek banks (something he is already doing)—it has to be an elected official. But neither Merkel nor Juncker nor Dijsselbloem is willing to step up to the plate and force Greece out (thereby possibly initiating the process of Euro unraveling). It has to be a desperate Greek government itself that cuts the ties and starts printing new Drachma to keep paying salaries this month (not to mention the April 9 IMF loan repayment it can never meet without access to the last bailout tranche overdue since Feb. 28). However, if the Greek government unilaterally takes responsibility for cutting loose now, they logically should have campaigned for leaving the Euro, devaluing and defaulting from the beginning (Varoufakis’s infamous middle finger strategy) instead of promoting their illusionary platform of both staying in the Euro and ending austerity. They will be discredited with their electorate and have lost all legitimacy.

So who winds up taking responsibility and getting egg on their face is anyone’s guess. But my bet is that Greece, one way or another, will be out of the Euro by April 9: going going Grone. Kicking the bailout can down the road again with shambolic name games has simply become too ridiculous even for the well-practiced Eurozone.

Has the Greek debt crisis morphed from a game of chicken into a game of turkey?

About Me

I'm a research economist at UNU-MERIT (Maastricht, The Netherlands) and IIASA (Laxenburg, Austria) with a specialization in the economics of innovation, complex dynamics, economic growth and evolutionary economics. By the 2008 world crisis at the latest it became clear that macroeconomics, financial markets and economic policy cannot be entrusted anymore to mainstream economists. Hence this blog.